Adani Australia project: Firing up coal supply

The coal sector has been hotting up lately with a series of new developments that are likely to be positive in the long term for the power sector.

Adani Enterprises has received an environmental nod from the Australian Government to develop a coal mine in the Queensland region.

The mine is estimated to produce 60 million tonnes (mt) of coal annually and have a lifetime of around 90 years. The coal will primarily be exported to India through a port, which will be linked to the mine through a private rail linkage developed by Adani.

The problems in coal supply go deep. Coal production in the country has been subdued in the last few years, hovering around 560 mt in 2013-14, lagging demand which was in the range of 720 mt. Using imported coal is unviable for power plants that are far from the port, besides being expensive. The cost of coal imports has risen due to an increase in clean energy cess on imported coal – from ₹50 to ₹100 a tonne in the recent Budget.

On the other hand, local supply is limited by non-availability of rail linkages. At least one point of linkage was addressed in the Railway Budget with a proposal to speed up the construction of critical coal connectivity lines. This could increase output from Mahanadi Coalfields in Odisha by an additional 11.2 mt a year. If the transport connectivity issue, which is long pending, is addressed, then power companies may enjoy low-priced inputs. But availability of overseas supplies will ensure that power plants don’t idle due to lack of fuel.

The approval is good news for Adani on multiple fronts. For one, the proposed coal mine, with a development price estimate of over $10 billion, will be one of the largest mines globally. And given the company’s presence in shipping, port development and power, the go-ahead for the new coal field development bodes well for its ‘pit to plug’ strategy.

However, while coal is in short-supply in India, power producers may not be willing to pay a high price, since their ability to pass on the higher price to distribution companies is limited. Due to the strict environmental norms and development cost, Adani’s cost of production is likely to be high and, hence, profitability needs to be watched closely. For instance, GVK, which operates a mine close to the Adani mine in Australia, has been impacted by the fall in coal prices. An improvement in global coal prices will help Adani’s prospects.

The arrival of this coal, possibly within the next three years, will brighten the prospects of coal-based power producers such as Adani Power and Tata Power.

These power producers have one more reason to cheer today – the Coal Ministry is asking Coal India to reduce its e-auction volume to 25 mt this year, down from 58 mt last year.

Unlike contracted coal prices, auctioned coal prices tend to be higher, based on demand and, hence, Coal India has been reluctant to cut its e-auction volume.